With the second economic stimulus package officially signed by the President, we can start to plan for some of the tax changes included in the package before the 2020 filing season opens up. There were a few changes that most people were expecting, along with many changes that no one was expecting. Here is a breakdown of some of the bigger changes that may impact your tax situation.
PPP Loan Tax Implications
After the passing of the CARES Act, the IRS stated that although any forgiven PPP loan proceeds would not have to be included in taxable income, businesses would not be able to deduct the expenses paid for with the forgiven loan proceeds. This presented an extremely unfavorable tax outcome for many struggling businesses. However, under the new package that passed at the end of December, Congress clarified that businesses are to be allowed deductions for any expenses paid with forgiven loan proceeds.
They also clarified that the forgiven loan will increase the shareholder’s basis in the company, similar to how tax exempt income increases a shareholder’s basis in a company. For s-corporations, this is huge. S-corporation owners can only deduct losses that they have sufficient stock or loan basis for. If a company were to show a large loss in 2020 but didn’t receive an increase in basis from the PPP loan, they would be required to carry the loss forward until their basis is restored. There are some concerns, however, as to the timing of all of this. If a PPP loan is not forgiven until 2021, will the shareholder have to wait until 2021 to claim the losses? Many tax practitioners believe that if the shareholder has a reasonable expectation that the loan will be forgiven, they should be able to get it off the books in 2020. Hopefully IRS guidance will clarify this sooner or later.
Recovery Rebates for Stimulus Checks
There have now been two sets of stimulus checks sent out in 2020 (possibly one in early 2021, depending on timing). The first was for $1,200 and the second was for $600. These checks were essentially advances on tax credits for the 2020 tax year. If you received the full amount of both stimulus checks, you should have nothing to worry about. However, for individuals that received a reduced amount or nothing at all, it is possible you’ll be eligible for an additional credit on your 2020 tax return.
The first example is that of an individual or married couple that had income above the phaseout range in 2019, but had a decrease in income for 2020. The stimulus checks were calculated using 2019 (or 2018 in some cases) tax data. If your income was over the phaseout threshold in 2019, you would have received a reduced stimulus payment or potentially no payment at all. If in 2020 your income decreased below the threshold, you’ll be able to claim a credit on your tax return and receive the payment you were entitled to based on 2020 income. If your income increased in 2020 from 2019, there are no “claw-back” provisions in the bill. This means you won’t have to pay back any of your stimulus payment because your income went up.
The second example of this is for college students. Many college students were disappointed that they did not receive a stimulus check because they were claimed on their parents’ return in 2019, and dependents were not eligible for stimulus checks. If, however, you are no longer a dependent in 2020, you’ll be able to receive your stimulus checks in the form of a credit on your taxes (assuming you are not over the income threshold). When filing, you’ll need to make sure you are not eligible to be claimed as a dependent and claim the “recovery rebate credit.” Talk with a tax professional (me) if you have questions about this.
Since the standard deduction is so high now ($12,400 for singles and $24,800 for marrieds in 2020), very few people are able to itemize their deductions. Because of this, many charitable organizations were struggling to receive the same level of donations they have in the past. For 2020, there is now an above-the-line deduction available for charitable donations up to $300. These cannot be non-cash donations such as clothing or household items. This will allow many individuals who do not itemize deductions to receive a tax break for charitable contributions. This deduction will now also be allowed in 2021, and will be increased for married couples to allow for $600 in total deductions.
Mortgage Insurance Premiums
Mortgage insurance premiums have been deductible in prior years, but were set to expire this year. However, the new stimulus package also included some tax-extender legislation that will allow this deduction through the year 2025. If you are paying mortgage insurance premiums AND you itemize your deductions, this is a favorable change.
For the first four years of college, most college students (or more likely their parents) claim the American Opportunity Credit on their tax returns. This is the most valuable education credit, but it is only available for the first four years of higher education. For students that continue school after a bachelors degree, there have historically been two options available. One was the lifetime learning credit, and the other was the tuition and fees deduction. The lifetime learning credit was more valuable most of the time, but the income phaseout was low ($58,000 in 2019 for single people). If you were phased out of the lifetime learning credit, you would then try to take the tuition and fees deduction (complete phaseout at $80,000 in income for single people). This legislation gets rid of the tuition and fees deduction entirely for tax years 2021 and after, and it also increases the income limits of the lifetime learning credit. This credit will now start phasing out at $80,000 in adjusted gross income ($160,000 for married couples). Although this won’t impact 2020 tax returns, it is a favorable change for 2021 and after.